A partial budget is often used to evaluate ideas and undertake sensitivity analyses. Once you've completed a partial budget, complete further analysis such as annual budgets and cashflows.
Partial budgeting is a simple planning tool used to estimate the financial gain or loss by changing some aspect of the business or making a ‘partial’ change to the farm system.
It focuses only on the changes in revenue and costs that would result from implementing a specific alternative rather than including all farm revenue and costs.
When and how do you use a partial budget?
Partial budgets can be used for:
Identify the most 'important' factors first
Partial budgeting analysis is a useful tool in decision making however does not necessarily lead to identifying the most important or high priority areas that contribute to overall farm profit.
It can therefore be very helpful to have completed a full historical financial analysis of the farm business to identify the current overall farm performance e.g. an option may be to grow turnips but, after further analysis of the whole farm, pasture utilisation is low and herd mating results are below target. Because of this there may well be a higher return by focusing on improving these factors first.
Handling capital expenditure and change in debt
To account for capital expenditure as part of a proposal depreciation and cost of capital or interest cost should be included. If assets are sold an interest saving should be included rather than the total asset value.
Net present value approach
Partial budgeting does not account for changes in the value of money over time. If analysis is required to focus on effects that occur more than a year or two in the future, then a net present value approach should be used, which discounts the dollar amounts in future years to account for the lower value compared to current-year dollars.